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Wednesday, April 24, 2013

Reverse innovation

If you happen to be the CEO of an Indian corporation, you might do well to pick up this book in order to understand the opportunities that your country has created and how the very existence of your company threatens competition in resource rich nations. But make no mistake, this book is really meant for a very limited set of readers – individuals in leadership roles at MNCs based in the rich world. For a very long time now, the spectacular rise of third world nations has rendered a lot of ‘management terminologies’ almost obsolete. How do you explain the phenomenon of Western nations importing certain innovations from countries like India and China (megamarkets with microconsumers), when the Harvards & Apples of this world have taught the exact opposite for years altogether? To be true, economic turmoil coupled with weak demand in their home markets has compelled companies to increasingly shifting their focus to developing markets. But there is hardly any organisation, which can boast of a concrete game plan for growing in countries like Bangladesh, India and China. Most of them are in the ‘market share race’ when they should actually be front runners in the ‘market development race’. Dr. Vijay Govindarajan and Chris Tremble, believe that there is a way they can do so. They call it Reverse Innovation. In fact, this concept might even become a source of competitive advantage for companies that can leverage it. Take Mahindra & Mahindra (M&M) for instance. When the Indian automobile major arrived in US with its sturdy 35 horsepower tractors, Deere & Company (the dominant tractor brand) didn’t even feel mildly intimidated. After all, who would prefer a brand that sounded anything unlike America and sold low power red tractors. Instead of taking the competition head on, M&M decided to excel in a small agricultural niche. To offset the negativity that would be associated with a third world brand in those days, M&M forged relationships with small dealerships offering personalised services. The bet paid off. M&M grew by around 40% in US from 1999-2006 and is now the number one tractor maker globally (by units). This case (along with several others discussed in the book) in summary, represents Reverse Innovation.

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Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri

and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles

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Saturday, April 20, 2013

Optimal Mix: Managing a portfolio of supply contracts

The oil and refinery business is complex. Sometimes, companies lose on profit margin and market share if they don’t have an idea of managing supply contracts. The right mix of long- and short-term contracts can lead to a bigger profit.

When an oil refining company spends billions of dollars to build or upgrade a refinery, one of its main concerns naturally is how to get a good return on such a massive investment. In particular, the company would like to make sure that it sells the refinery’s products – mostly gasoline – in markets that would maximise its profit. A guaranteed long-term contract to supply gasoline seems most desirable, but the company may also want the flexibility of pursuing higher profit margins offered by shorter term contracts.

This was the dilemma faced by BP, one of the world’s largest oil and gas companies, as it completed a multi-billion dollar upgrade of its Whiting refinery in Indiana that would increase the refinery’s production by 1.7 million gallons of gasoline and diesel a day. To help BP find the best way to sell the refinery’s output year after year, I along with Shanshan Wang, PhD ‘11, developed a model that would allow gasoline companies to optimally adjust their portfolio of supply contracts over time, in anticipation of changing market conditions. This model is discussed in our study titled “Contract Portfolio Optimisation for a Gasoline Supply Chain.” While the work is motivated by BP, it has broad application to gasoline suppliers across the industry, which generates around $300 billion in annual revenue in the United States.

Gasoline, which is produced by processing crude oil in a refinery, is marketed to three distinct channels. The first is the branded channel where gasoline with specialty additives is sold through stations that bear the name of a major supplier such as BP, and are owned by independent firms or so-called branded “jobbers.” A BP jobber is obligated to sell only BP gasoline and BP is obligated to supply all the gasoline that the stations need. The contract typically runs for 10 years but virtually lasts forever, since an industry law called the Petroleum Marketing Practices Act prohibits BP from terminating the contract.

Gasoline also can be sold as a generic commodity through the unbranded channel, such as gas stations at Costco, Walmart, and Safeway. These outlets will typically negotiate a price to buy a specific volume of gasoline from a supplier for one year.

The spot market is the third channel, and that is where the major suppliers, unbranded jobbers, and other distributors come together to buy and sell gasoline. Refiners can sell any leftover product to the spot market after satisfying their contract commitments.

The key to maximising profit is in choosing how much of the refinery’s output should be sold to each channel given the uncertainty in the price and demand for gasoline. If BP sells its gasoline through an inappropriate mix of channels, then it may either not sell out its capacity or end up selling at a much lower profit, By adjusting the share that each channel receives over time to reflect changing business conditions, as opposed to a strategy of simply fixing the shares, the company’s expected profit can increase by more than 40% under some scenarios.

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Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri

and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles

National

Lower GDP Stats
Despite desperate attempts of the government to move the numbers in the economy’s favour, GDP growth projections for the current fiscal year remains at 6.9% against last year’s figure of 8.4%. The slowdown in investments and low industrial output are the reasons for this decline. However, finance minister Pranab Mukherjee is still confident that the numbers will look up when full data for the year 2011-12 becomes available. The government has already run up fiscal deficit of 92.3% of its budget estimates in the first nine months of the current year, mainly due to less than anticipated tax collections. The central government has managed to raise Rs 5.2 trillion in revenue during the period, which is 61% of the budgeted target for the entire fiscal. The figures indicate that the government will find it difficult to meet its budgeted fiscal deficit target of 4.6% for the current fiscal. A lower than expected 1.8% growth in the index of industrial production (IIP) for the month of December 2011 has not helped matters either. Meanwhile, much to the relief of the government, the wholesale price inflation is on a 26 month low and is expected to stay at these levels at least for the next few months.

Airlines cheer
Much to the relief of airlines the group of ministers (GoM) has okayed the proposal for direct import of aviation turbine fuel (ATF), which contributes around 40% of the overall operating cost of an airline. However, the decision is yet to get the Cabinet go-ahead, which will open the way for implementation of the scheme. Airline operators have been lobbying for quite sometime for either imposing a flat 4% sales tax or to allow them to import ATF directly. The GoM’s approval of the scheme sent share prices of airlines like Jet Airways, Kingfisher and SpiceJet on an upward spiral as investors cheered the move. Allowing direct import of ATF will help airlines to save on sales tax, which varies from state to state. The absence of a uniform sales tariff has forced airlines to bear the cost of around 30% rise in their fuel expense on a y-o-y basis. Surprisingly, ATF in India is at least 60% higher than prices in West Asia or even Southeast Asia. ATF makes for 40-50% of the total cost for airlines companies. No wonder that operators like Jet and SpiceJet have been complaining that it’s the high fuel cost that has been responsible for their December quarter losses.

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Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri

and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles

Tuesday, April 16, 2013

Four looks like a crowd

Sony is looking to get a better grip on its mobile phone division by acquiring Ericsson’s stake in the JV. But a real turnaround may require radical rethinking on the company’s strategy

For Chairman, President & CEO Howard Stringer, who is expected to step down next year, mixed feelings would normally be a given. But he may mostly end up contemplating on what could have been. Sony hired the Welsh-born former President, CBS and founder, TELE-TV, in 2005 to turnaround its businesses and revive the brand’s iconic status. Neither of the aims seem to have been met.

This year, the TV business is expected to lose money for the eighth year in a row with competitors like Samsung gnawing away market share fast. Other businesses like computing and gaming also face tough competition from the likes of Microsoft and HP. Sony Corp. has sold a lot of its TV manufacturing plants since 2009. It now plans to further restructure the division, which may include teaming up with other companies or spinning off the business in its entirety. At one point of time, Sony was worth $100 billion. Today it is valued at $18.05 billion (November 7). Its m-cap is down by more than 50% since Stringer became Sony’s first non-Japanese CEO. Despite being the first mover and market leader in portable music players, Sony lost it all and Apple is the one, which really struck gold on multiple occasions with iPod, iPhone and iPad. There were some victories – like gaming, Blu-Ray and 3D film making, and Stringer has successfully unleashed a series of cost cuts in the company. But mere cuts, unless they are accompanied by strong & inspiring ideas and painstakingly immaculate execution, cannot take a company too far.

On October 27, 2011, Sony announced that it would be acquiring Ericsson’s stake in the Sony Ericsson JV for $1.45 billion. If one looks at Sony’s performance over the past decade, it gets apparent that apart from financial misfortunes, its strategy has been a complete misfit across business segments (except for gaming). And smartphones is one of them, a wrong that Sony hopes to correct with this deal.

In 2000, Sony was struggling to make a mark in the global cell phone market with a marginal 1% market share. It then forged a JV with Stockholm-based Ericsson in August 2001. However, the JV bombed, as it managed to appreciate market share by a mere 1%. The company is now looking at upping its stakes in smartphones. When contacted by B&E, Sony’s spokesperson for A-Pac commented, “It has been Sony Ericsson’s target to become a leader in the global Android phone market in terms of value share. (rf. Sony Ericsson’s CY11Q3 market shares are 11% in value). Through integration of Sony Ericsson, Sony will be able to integrate functions such as product R&D and design, and accelerate adoption of new platforms & technologies for better user experiences.”

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Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri

and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles

Monday, April 15, 2013

Can Amazon’s Kindle Fire turn the heat on Apple’s iPad?

The iPad has spawned an array of wannabes and clones but Amazon’s Kindle Fire tablet is being hailed as a truly disruptive product that could shake Apple’s hold on the tablet market.

A100 years from now, when a Pulitzer prize winning author of that generation pens down a book on the consumerisation of IT, he’ll probably pick up year 2011 as the starting point. In more ways than one, 2011 will be remembered as the year that kick-started a train of events, which transformed the technology landscape once and for all. First it was Hewlett Packard (the world’s largest IT corporation) announcing its exit from the PC business. Then Steve Jobs, the world’s most definitive authority on technology passed away. In between the Jeff Bezos led Amazon.com jumped on to the IT (hardware) bandwagon — a domain that had hitherto been left largely untested by the online mega-store.

And on the topic of Amazon’s IT ambition, despite its sensational and bold gambit in the arena of consumer technology, it calls for an audacious leap of faith to even imagine that there can even be a formidable competitor to Apple. Legions of techno geeks will avow that there is none to match Apple when it comes to integrating hardware and software so brilliantly. All the same, none can fail to observe how a single product — the Kindle Fire — launched by Amazon recently, gives this company the potential to achieve a feat that in every way matches Apple’s technology and design prowess.

But before dwelling on how the launch of Kindle Fire can help Amazon grab an enviable standing in the IT industry, it would be pertinent to go over how the company has been faring under founder and CEO Jeff Bezos over the past few years.

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Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri

and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles